A Sieve-SMM Estimator for Dynamic Models
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This paper proposes a Sieve Simulated Method of Moments (Sieve-SMM) estimator for the parameters and the distribution of the shocks in nonlinear dynamic models where the likelihood and the moments are not tractable. An important concern with SMM, which matches sample with simulated moments, is that a parametric distribution is required but economic quantities that depend on this distribution, such as welfare and asset-prices, can be sensitive to misspecification. The Sieve-SMM estimator addresses this issue by flexibly approximating the distribution of the shocks with a Gaussian and tails mixture sieve. The asymptotic framework provides consistency, rate of convergence and asymptotic normality results, extending existing sieve estimation theory to a new framework with more general dynamics and latent variables. Monte-Carlo simulations illustrate the finite sample properties of the estimator. Two empirical applications highlight the importance of the distribution of the shocks for estimates and counterfactuals.
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